Vanity, Thy Name Is Growth

Earnings growth at a reasonable price is getting hard to find in this market after a 10%-plus rally since June. Third-quarter earnings estimates have come down significantly over the last few months and domestic GDP will be lucky to come in at a 2% level for the year. Maybe it is because I live in Miami, the cosmetic surgery capital of the country, but I find two suppliers to that business intriguing right now. One I already own and the other I am looking to pick up on the next market pullback. Neither is currently making money, but both are experiencing rapid revenue growth, have cash-rich balance sheets, should turn profitable in the near future and have very strong growth prospects ahead of them.

Cynosure (CYNO) develops aesthetic treatment systems to the dermatology, plastic surgery, and general medical markets. Its aesthetic treatment systems incorporate a range of laser and other light-based energy sources.

Four reasons Cynosure is a solid growth pick at $26 a share:

Earnings are ramping up quickly. The company lost $0.23 a share in fiscal 2011 but is on track to make $0.60 a share in fiscal 2012. Analysts are currently projecting 40% growth from that level to $0.84 a share of earnings in fiscal 2013.

Cynosure has a robust balance sheet with more than $70 million in net cash on the books (over 20% of current market capitalization). The stock has a small five-year projected PEG (.48) as well.

The company has crushed earnings estimates each of the last three quarters. It has beat consensus by over 100% in each of these quarters. Consensus earnings estimates for fiscal 2012 and fiscal 2013 have risen by some 40% in the last month.

Cynosure is on track to book more than 30% revenue growth in fiscal 2012 on the back of Food and Drug Administration (FDA) approval of its cellulite treatment in January. The median analysts' price target is $32.

ZELTIQ Aesthetics (ZLTQ) develops non-invasive products for the selective reduction of fat. Its CoolSculpting System utilizes proprietary controlled-cooling technology to selectively reduce stubborn fat bulges that may not respond to diet or exercise

Four reasons ZLTQ is a good speculative play at under $5.50 a share:

Revenues are increasing at a rapid pace. Zeltiq had $68 million in revenue in fiscal 2011 and is on track for more than $84 million in sales in fiscal 2012. It should easily surpass the $100 million mark in fiscal 2013.

The company has more than $55 million in cash on the balance sheet, which amounts to more than 25% of its market capitalization at the current stock price. Zeltiq is burning through around $10 million annually currently, so it has more than adequate cash to see it through until it becomes profitable in fiscal 2014.

This is a "razor and razorblade" story. The company markets its CoolScupting® machine (the razor) and in turn gets paid for each procedure (the blade). Recurring revenue from procedures have gone from 30% of revenues in the first quarter of 2011 to more than 46% of sales in the second quarter of 2012. Each procedure costs approximately $1,600 and does not require surgery.

Zeltiq's best growth prospects are ahead of it. Its installed base will continue to grow and it has barely touched the international market. In addition, its system is only approved for use on certain parts of the body. It is currently going through the approval process to get it approved for other areas (for example, upper arm fat).

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